You may be familiar with the sinking feeling in the pit of your stomach when you must have a conversation with a member that goes as follows: “I’m so sorry to hear about your wife’s accident and I hope she’s well and back at work soon. However, you’re behind on your auto loan payments.”
The conversation you’d rather have goes something like: “I’m sorry to hear about your wife’s accident. Rest assured that your loan payment will be taken care of until your wife is back at work. That was a smart move putting joint credit disability insurance on this loan.”
The second scenario is less nerve-wracking for all involved. It also means a product such as joint credit disability insurance or debt protection is doing its job.
But for that to happen, it sometimes requires helping members work through some common misunderstandings.
If you’ve explained disability payment protection products to a fair number of co-borrowers you’ve probably heard variations of the response, “We both have disability benefits through work… I think.” That’s a red flag.
Certainly, some members who aren’t sure whether their employers provide disability benefits actually do have it. They may have short-term or long-term disability benefits, or both.
But sometimes they don’t.
The Advantages of Joint Disability Payment Protection
As of 2013, nearly half of all U.S. families had two working spouses, including almost 60% of all families with children, according to the U.S. Bureau of Labor Statistics.
You can bet most of these spouses aren’t working for the fun of it—their income is critical for paying bills and putting food on the table.
If your credit union offers disability payment protection that includes joint protection, such as credit disability insurance or debt protection, be sure co-borrowers know about its advantages.
Joint disability payment protection generally costs members less than the combined cost of separate single protection for two people. Only one of the covered co-borrowers must be disabled for the coverage to kick in.
Most states now allow joint disability payment protection. If your credit union offers this protection, work with your lending staff so they’re up-to-date on how to explain it to members.
Another common scenario: One working spouse or co-borrower has these benefits but the other doesn’t. Or one has excellent disability benefits while the other’s benefits are minimal.
Perhaps members who say they have disability protection are actually referring to workers’ compensation benefits, and they don’t know the crucial difference between the two.
Often, one or two quick questions during a loan closing can clear up these misunderstandings, or at least prompt members to check with their employers.
Help members assess their risk
To help members make a good decision, here are some basic follow-up questions and points to use in response to the most common reactions about disability protection options:
“I think we already have disability benefits through work.”
If you’re counting on both of your incomes to meet your loan obligation, do you both have disability benefits through work? Do you know whether you and your co-borrower have protection for short-term disability, long-term disability, or both?
Some disability benefits, especially long-term disability, pay only a fraction of your monthly paycheck, typically 40% to 60%. Some monthly benefits are also capped, regardless of your regular pay rate.
“We’d get workers’ compensation benefits if one of us couldn’t work.”
Do you know the difference between workers’ compensation insurance and short-term or long-term disability insurance?
Workers’ compensation only applies to work-related illness or injury, which is rare. Fewer than 5% of disability claimants in companies surveyed by the Council for Disability Awareness also received workers’ compensation payments in each of the years from 2009 through 2013.
“Social Security has benefits for disabled workers.”
Do you know how difficult it is to get Social Security disability benefits?
The Social Security Administration reported in 2014 that it denies 66% of Social Security disability claims. For example, claims are generally denied if the disability isn’t projected to prevent the person from working for at least one year.
After submitting a Social Security disability claim, you’ll typically wait at least three to five months just to get a decision, and you won’t begin to receive benefits for five months from the onset of your disability.
Why this conversation matters to members
If initiating this type of conversation seems pushy, take a pragmatic look at this issue from the member’s point of view.
When you’re taking on a new monthly payment (or, as with many rolled-over auto loans, an increased monthly payment), at some level you know this obligation is a risk: If you can’t make the payments, you could default and lose the collateral, hurt your credit rating, etc.
Joint disability protection products help guard against this risk at a reasonable cost, with no medical exam required to be eligible. And joint protection is an especially good value because it covers both borrowers but generally costs less than separate single protection for two people.
This protection could have a significant impact beyond the stretch of time when it helps a disabled member make loan payments.
Think about how hard it is for some members to raise or maintain their credit score, and what a profound difference that score can make in interest payments over the life of, say, a mortgage.
As the Consumer Financial Protection Bureau advises consumers, “To get and keep a good credit score: Pay all your bills on time.”
Credit bureaus don’t cut your members any slack when they can’t make loan payments because one or both borrowers were temporarily disabled.
Don’t get me wrong: None of these practical considerations mean all co-borrowers need joint protection on every loan. They simply underscore why it’s in your members’ best financial interests for you to help them make an informed decision.
Why this conversation matters to CUs
Disability protection creates two advantages for credit unions: noninterest income and risk management.
Noninterest income gained through protection products is nonpunitive: Members receive a benefit rather than pay a fine.
Protecting loan payments through a joint disability protection product may not only generate goodwill toward your credit union, it may reduce delinquencies, charge-offs, and defaults.
Aside from these tangible advantages, helping members manage their risks and avoid financial hardship is part of the credit union movement’s culture. Your time and effort to ask an extra question or two isn’t wasted, sale or no sale.